How much tax will we evade in 2025?

When the new year's budgets are finalized, friends who are experts in finance make news and commentary, saying, “Item by item, how much tax will we pay this year?”

Generally, everyone thinks that there is a significant amount of informal economy and widespread tax evasion in Turkey. However, there is not much discussion about the scale of this. I calculated the estimated amount of tax loss and evasion for the year 2024 and wrote about it in 12 Punto on June 23rd with the headline “They pay 1, they evade 10!”

I estimate that this year's tax loss and evasion will also be around 13 trillion 400 billion liras.

On Friday, January 10th, the esteemed tax expert Nedim Türkmen from Sözcü Newspaper wrote, “I claim that there is more informal economy in Turkey than the registered economy, and I will continue to claim so.”

I agree with Nedim Türkmen that the informal economy is larger than the registered economy. I am not a specialist in the field of finance. I evaluate the issue within the framework of macroeconomics. Without looking at the registered or unregistered sectors, I put forward a claim regarding tax potential based on Turkey's economic size, and I say that those who pay tax based on declaration pay 12 percent of the tax they should pay, and do not pay 88 percent of it.

I base this estimate and claim on two separate sets of data, and I reach the same magnitude in both with a very small deviation: “Turkey's tax collection capacity (potential) for 2025 is around 24 trillion. However, the amount of taxes the state aims to collect in the 2025 budget is 11 trillion 139 billion liras…”

The first indicator I use in the estimate: The shares of indirect taxes and direct taxes within total tax revenues…

Another indicator is the ratio of total tax revenues to national income (GDP)…

TAXES TO BE COLLECTED

Total tax revenues to be collected for 2025 are 11.139 trillion liras…

Corporate Tax is 1 trillion 637 billion liras, its share is 15 percent…

Income tax is 2 trillion 130 billion liras, its share is 19 percent…

The total of Income and Corporate tax, in short, the total of direct taxes is 3 trillion 767 billion liras, its share in total taxes is 34 percent…

The total of many indirect taxes such as VAT, SCT, motor vehicles, and customs is 7 trillion 372 billion liras, its share in the total is 66 percent…

The imbalance and injustice in Turkey lie here. The share of total direct taxes is 34 percent, and the share of indirect taxes is 66 percent. However, when we look at the averages of developed countries, the share of direct taxes is 70 percent, and the share of indirect taxes is 30 percent… The golden ratio we have is 70/30; if we convert this into a multiplier, it is 2.3333…

From this, we understand that if the Turkish economy has the capacity to collect 7 trillion 372 billion liras in indirect taxes... An economy that pays this much indirect tax can produce 2.3333 times the indirect taxes in direct taxes according to the 70/30 ratio. This amounts to 7.372 x 2.3333 = 17 trillion 201 billion liras. (You can also verify this with cross-multiplication. If you set up the equation as: if 30 is 7 trillion 372, how much is 70, you will find 17 trillion 200 billion.)

Instead of 17 trillion 200 billion liras, 3 trillion 767 billion liras in direct taxes are paid. In this case, the amount of tax loss and evasion reaches 13 trillion 400 billion liras.

When we add the 11 trillion 139 billion liras to be collected in 2025 to the 13 trillion 400 billion liras, we see that the tax potential in the Turkish economy is around 24 trillion 500 billion liras.

THEY PAY 12 PERCENT, 88 PERCENT EVAPORATES

When we look at the budget, 93 percent of the income tax collected in Turkey is deducted at the source via withholding. The remaining 7 percent is paid by self-employed professionals, numbering 2.5 million people, such as jewelers, contractors, lawyers, architects, engineers, dentists, doctors, restaurant owners, pastry chefs, and tailors, through declarations.

Accordingly, self-employed individuals will pay 7 percent of the 2 trillion 130 billion liras of income tax, approximately 150 billion, through the declaration method. They will pay an average of 5600 liras per month. It's ridiculous…

The total payments of those who pay tax based on declaration are 1 trillion 637 billion liras in Corporate Tax and 150 billion liras in income tax… The sum of both is 1 trillion 787 billion liras. They pay 1 trillion 787 billion, they do not pay 13 trillion 400 billion.

If we look at it together with workers and civil servants who have no chance of evading taxes, 22 percent of the taxes that should be collected in Turkey are collected, and 78 percent cannot be collected. If we exclude workers, civil servants, and other income tax items deducted via rent and withholding at the source, 12 percent of the taxes based on declaration are collected, and 88 percent cannot be collected.

NATIONAL INCOME AND TAXES

Let's make an estimate by looking at the second piece of data that confirms this finding. That is the ratio of total tax revenues to national income (GDP)…

The total tax revenue to be collected in Turkey is 11.139 trillion.

In the Medium-Term Program, the national income (GDP) size at current prices projected for 2025 is 61.5 trillion liras.

The ratio of taxes to national income is 18 percent.

However, in developed countries, this ratio is between 40 percent and 55 percent. It is around 55 percent in Northern Europe, where the welfare state is strong.

If we take it from 40 percent, 40 percent of 61.5 trillion comes out to 24 trillion 600 billion liras. Our estimate of Turkey's tax potential, which we made above using the 30 percent indirect tax and 70 percent direct tax ratio, also came out to around 24 trillion 500 billion. We reach the same result when we look from two different angles. I claim that this is the tax potential of the economy in Turkey.

WHO IS NOT PAYING TAXES

In the headline, I asked, “How much tax will we evade in 2025?” In the article, I insistently say “they do not pay” instead of “evade.” The reason is this…

The state knowingly does not collect 3 trillion liras of the 13 trillion 400 billion lira tax loss. This is called tax expenditure. 800 billion liras of this 3 trillion liras is the “minimum wage tax exemption”… This is a waiver that is considered normal in this society… 2.2 trillion liras are the taxes of pro-government companies that were wiped out with state incentives… Since there is no planning and a development model based on a plan, it is doubtful whether the taxes waived due to investment incentives contribute to the economy…

A portion of the remaining 10 trillion in tax loss, the amount of which we cannot estimate, goes to religious sects, and the rest is evaded. In the period before the AKP, the amount of donations made to charities that could be deducted from taxes was limited to 5 percent. However, later on, all donations made to certain religious sects in kind and cash, such as food and goods aid, as well as donations in areas such as building mosques and building dormitories for sects, were exempted from taxes. Foundations belonging to sects began to operate like a parallel Ministry of Finance.

The system works like this: The foundation or association of the relevant sect issues a 100-lira receipt to a company that should pay 100 liras in taxes. The person or company becomes completely tax-exempt. However, how much the company pays to that foundation or association is unknown. For example, they might pay 50 liras, and 50 liras remain with them. The foundation or association spends a portion of the 50 liras it receives on the relevant charity work and can share the remaining portion according to the hierarchy among themselves. Considering the palaces of the sect leaders, the cars they ride, and the luxury they live in, I think this possibility should not be underestimated. (I wrote a detailed article on this subject in 12 Punto on August 11, 2024, with the headline “This is also the tax plunder of the sects.” I recommend those interested to find it in the archive and read it.)